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The Importance of Lean Business Strategies

Describe about the Considerable Business Progress for Business Industry.

Science has made considerable progress in industrial uses of materials and how to manipulate basic processes to create the same things faster and better with more efficiency. The inherent needs to change the way existing things are done are part of the “Process engineering”. It involves building a model of a process (usually multi-step, parallel or series operations) usually industrial, managerial and engineering related. Administratively, streamlining the work-flow, effective use of information technology and software helps in savings administrative heavy – lifting.

All this reduced time of employee’s time in ineffective and non-productive jobs helps in saving effort which can be utilized for other productive activities (Northington, 2011). This will reduce the man-power requirement where maybe 2 people were required, 1 person might suffice. This competitiveness in labor requirement will create a chain reaction of savings on materials required, efforts utilized, automation and time saved.  Staying lean in cost and agility to change helps in creating newer products by adapting to the environment.  Lean  strategy  has been historically associated with  manufacturing  and  has  now shown its use along  the  value  chain right  from  sales  to  logistics,  product  design, development, manufacturing,  purchasing,  administration and  back to sales.  This holistic approach is becoming known as Lean Business (Needles & Power, 2013).

The important factor is the company’s ability to work faster and reduce process time. For this, the company’s cycle time is a significant, and a complex process that starts from the time a vendor ships materials to the company to the point when the company moves the final product to the customer. (Brealey et. al, 2011). This measurement of number of units of material received, goods produced and shipped in a certain period of time is called the cycle time and indicates the general efficiency of the supply chain. There are several linked parts in a company’s cycle time:

Production cycle time – this is measured as the total time taken in the production of a product

Order processing - this is the time  taken for processing an order

Cash-to-cash cycle time – this is the time needed to plough back the financial investments

A company’s ability to convert manufacturing costs to profits  is tested by an extended cycle time. To maintain an efficient and agile supply chain, a short cycle time is required. Once can say a productivity loss is happening when there is wastage of resources, cost overruns, unfavourable customer experiences and less success in the market.

Cycle Time Optimization for Efficiency

Cycle time is an important performance metric and reveals insights into efficient and inefficient supply chain processes.. The length of a cycle time is determined by both internal and external factors. Some of the controllable factors for improving cycle time are capacity constraints, labor, manufacturing congestion, and inventory surplus, quality of the product, and schedule flexibility and management (Charles, 2012).

iii. Increased speed of processes can create challenges in controlling the results and ongoing control of errors. It is important while process re-engineering those new processes takes the time to come under strict control and supervision and can create the problem of non-compliance. The introduction of business process reengineering involves re-thinking and re-designing of business processes for achieving improvements in critical measures of performance-time, quality, and cost, and focuses on optimizing organizational performance by setting and monitoring service performance standards (Parrino et. al, 2012). Like other reforms before, it might not be easily accepted by all staff and adoption and implementation of quality reforms might not improve the level of service quality and customer satisfaction.

Many other potential problems might arise such as one department may be rationalized at the expense of another, there might be less time to focus on improving business process and there might be lack of recognition of the extent of the problem. Many times there is a serious lack in training.  People involved use the best and easiest  tool they have at their disposal and there might be lack of infrastructure. Also, overly bureaucratic processes and lack of motivation in the organization will cause a lot of issues in accepting increased speeds of processes.  Lack of control will create errors and might affect the dependability and reliability of products which will, in turn, affect the brand name.

For calculating the costs for both factories, absorption costing method is used. This takes into account both the direct costs (or variable costs such as labor, material) and indirect costs (or fixed costs such as machinery, land). This is complete cost of producing a finished good.

Since both factories are using the same method of costing, they can be directly compared. For producing the same product, the Brisbane factory is presumably costing less. We deduct that by the fact that the finished good balance has grown and that means they are able to produce more in that much of money. However, a point to be noted here is that it might also be an indication that the Brisbane factory is not able to push out the finished goods for sale and the inventory is piling up  (Libby et. al, 2011). This is also a bad sign that perhaps the market is not doing well, or the sales force is not working up to the mark and the production needs to be reduced in Brisbane. For checking this Steve Smith should check the inventory cycle and determine if the production is exceeding or the sales have reduced. Even after this, this factory has reported a net profit and hence the Brisbane manager is entitled to a bonus. The reasons for the net profit can be either low-cost or reduced sales. This needs to be investigated.

Challenges of Increased Process Speeds

In the Adelaide factory, there is zero net profit which means either the costs are very high or the sales are not getting pushed enough. However, we know that the finished inventory fell so it indicates more towards high costs. It may well serve Steve Smith to analyze the variable costs of both the factories along with the fixed costs. This might show some unique differences in the operating environment of both the cities concerning land, labor costs.

Under the Standard Costing method a company keeps an expected amount of costs for each expense and records the actual as variances from this standard amount. This concept of variance helps in bringing the quick attention of the management to the areas which are exceeding the expected costs and quick steps can be taken to control them (Lanen et. al, 2008).

The company has a set standard cost of material and labor. Since the material variances were favorable, i.e the actual costs incurred on materials were less than the standard costs expected, there have been savings in this regard.  However, in the case of labor variances, the actual costs incurred were far more than the expected standard costs (unfavourable labor variances). This shows an increase in labor costs.

Now if both of these variances set-off each other, then will not be much difference in the total cost. If the variance of the material cost is greater than the variance of the labor cost, the total cost will reduce and if the variance of the labor cost is more than the material cost, the overall cost will increase (Williams, 2012).

Usually, there are two kinds of variance under an expense. For eg. If we talk about material costs – it comprises of Quantity of material * Cost of each material unit. Similarly, for labor additional information of Number of labor * Cost of each labor is needed. Once the break-up of these costs is available into units used and cost per unit, the management can determine if the labor being employed is more or materials being used are more or the per unit cost of employing one labor has increased or the per unit cost of material has increased (Horngren & Frost, 2008).

The standard cost of a finished product is the sum of the standard costs of the inputs:

Direct material

Direct labor

Manufacturing overhead

Variable manufacturing overhead

Fixed manufacturing overhead

Variance Analysis for Cost Control

This will help in looking for alternative materials or increasing the efficiency of the labor employed. Thus the input quantity and per unit cost is one information that will be most useful for management.

Computation and showcase of the variable cost:

 

Budget A

Budget B

Overhead - Variables

 

Rs. 60000

Rs. 75000

selling and administrative expense (Variable)

 

Rs. 60000

Rs. 60000

Direct Materials

Rs. 260,000

Rs. 3,60,000

Direct Labor

Rs. 40,000

Rs.60,000

Total (i)

Rs. 4,20,000

Rs. 5,55,000

Units in total (ii)

20000

30000

per unit cost ( i/ii)

Rs. 21 per unit

Rs. 18.50 per unit

The variable cost in Budget B stands lower as compared to Budget A. Budget B pertains to the senior management while that of lower and middle management is higher.

A bottom-up approach is indicated from the preparation of Budget A. This indicates that the lower and middle management follows this approach. The management has a strong grasp of the internal factors (Albrecht et. al, 2011). The lower and middle management takes care of the activities that pertain to the operation and hence, the material cost runs in a higher form. The cost of material is predicted and hence they are chiefly engaged for the increment in cost.

The top level management is the target for increasing the profit, as well as sales of the company. This indicates that the management is heading for strong labor arrangement, work completion and grouping the variable overheads. However, in the process of the budget only the situations that are unfavorable are adopted. It stresses that the management is well composed with the matter of finance because the focus is more. However, the top-down approach offers a huge conception that leads to a proper understanding of the product sales. It gives a strong base in the smooth operation of the company (Horngren, 2013).

It is the main aim of the firm to function in a way that has the power to generate profit on a maximum basis. This can happen when there is a strong balance between the two. The management can work in collaboration in terms of achievement of production. The estimation of top management ascertains the production at Rs 18.5 per unit whereas the lower level management projects it at Rs 21 per unit. Further, the management at the top forecasts it at 30000 indicating enhanced profit. Hence, it signifies that a cordial link is present amidst the management.

References

Albrecht, W., Stice, E. & Stice, J 2011, Financial accounting, Mason, OH: Thomson/South-Western.

Brealey, R., Myers, S. & Allen, F 2011, Principles of corporate finance, New York: McGraw-Hill/Irwin.

Charles, T.S 2012, Cost Accounting: A Managerial Emphasis, Pearson Education

Horngren, C 2013, Financial accounting,  Frenchs Forest, N.S.W: Pearson Australia Group.

Horngren, C T  &  Foster, G 2008, Cost Accounting: A Managerial Emphasis: United States Edition

Lanen, W. N., Anderson, S & Maher, M. W 2008. Fundamentals of cost accounting, NY: Hang Loose press.      

Libby, R., Libby, P. & Short, D 2011, Financial accounting, New York: McGraw-Hill/Irwin.

Needles, B.E. &  Powers, M 2013, Principles of Financial Accounting, Financial Accounting Series: Cengage Learning.

Northington, S 2011, Finance, New York, NY: Ferguson's.

Parrino, R., Kidwell, D. & Bates, T 2012, Fundamentals of corporate finance, Hoboken, NJ: Wiley

Williams, J 2012,  Financial accounting, New York: McGraw-Hill/Irwin.

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